1. Introduction
Scarcity and choice are the most important fundamental concepts in economics.
These concepts explain the basic economic problems faced by every economy.
2. Scarcity
Scarcity means the situation in which people do not get everything as much as they want.
It is the fundamental fact that gives rise to economic problems.
If resources were not scarce, it would be possible to satisfy all human wants.
Therefore, scarcity is the central problem of an economy.
3. Choice
Choice is the process of selection from the available limited alternatives.
Economics is known as the science of choice because it deals with how scarce
resources are allocated to satisfy unlimited human wants.
4. Opportunity Cost
Opportunity cost is defined as the next best alternative foregone when an
economic decision is made.
- Only scarce goods have opportunity cost
- It arises due to scarcity and choice
- What we sacrifice is the opportunity cost
5. Production Possibility Curve (PPC)
Production Possibility Curve is the locus of various combinations of two goods
that an economy can produce with full and efficient utilization of its resources.
Assumptions of PPC
- No change in technology
- Full and efficient use of resources
- Perfect mobility of factors of production
- Resources are scarce
- Production of only two goods
Shape of PPC
PPC is concave to the origin due to increasing opportunity cost.
- Constant opportunity cost → Straight line PPC
- Increasing opportunity cost → Concave PPC
- Decreasing opportunity cost → Convex PPC
Shift in PPC
If the productive capacity of an economy increases, PPC shifts outward.
If it decreases, PPC shifts inward.
Uses / Importance of PPC
- To know the level of employment
- To show technological improvement
- To explain economic growth
- To measure economic efficiency
6. Allocation of Resources
Allocation of resources refers to the use of scarce resources to produce goods
and services that maximize human satisfaction.
Basic Problems of Allocation
- What to produce?
- How to produce?
- For whom to produce?
- How to use resources efficiently?
- How to achieve economic growth?
7. Allocation of Resources in Different Economic Systems
| Economic System |
Basis of Allocation |
| Market Economy |
Price mechanism (Demand & Supply) |
| Socialist Economy |
Central planning authority |
| Mixed Economy |
Market mechanism + Government planning |
8. Division of Labour and Specialization
Division of labour means splitting a production process into different parts
and assigning workers according to their skills.
Forms of Division of Labour
- Simple division of labour
- Complex division of labour
- Geographical division of labour
Advantages
- Increase in productivity
- Improvement in skill
- Saving of time
- Cheaper and quality goods
Disadvantages
- Monotony of work
- Risk of unemployment
- Loss of efficiency
- Exploitation
9. Economic System
Economic system refers to the system of production, distribution and allocation
of resources adopted by a country.
Types of Economic System
- Market Economic System
- Socialist Economic System
- Mixed Economic System
10. Economic System Adopted by Nepal
Nepal has adopted a mixed economic system with coexistence of public and
private sectors. The constitution emphasizes a socialism-oriented,
self-dependent economy.
Quick Revision Points
- Scarcity → Limited resources, unlimited wants
- Choice → Selection among alternatives
- Opportunity cost → Next best alternative foregone
- PPC explains scarcity, choice and opportunity cost
- Nepal follows mixed economic system